The new 1%

March 17, 2014

As the clock ticks down to the ACA open enrollment deadline, it appears that the most optimistic estimates are settling out at about 5 to 6 million premium paying enrollees. The eventual goal is more like 90% of the population, or about 286 million by about 2020.

How is that going to work out for insurance companies, or do they even care? After all, when the health insurance industry was nominally nationalized by the ACA, née Obamacare, there was a provision built into the law that guaranteed they wouldn’t go broke because of it. Insurers who are making money will be required to share those profits with companies that don’t do so well, and if that doesn’t level the playing field, the government, i.e. the taxpayer, will make up the difference. That certainly removes some of the angst from the insurance companies.

Make no mistake, the comparatively minor penalties in 2014, capped at 1% of your income will ratchet up exponentially from this point on. The exact formula is clearly spelled out on the healthcare.gov website. Suffice it to say, it goes from 1% of your yearly household income (not just wages) or a minimum of $95 per person in the household to 2.5% and $695 per person in 2016, after which the amount is adjusted for inflation. The key phrase is that the tax is figured on the average cost of a bronze plan.

As the price of the bronze plan goes up, and it will, the percentage rate must reflect that premium. Right now, the explanation itself assumes that the price of that plan will be at least 2.5% of your income by 2016. Even at its average cheapest rate today, and assuming no subsidy relief, that’s more than $695 per person annually. The fewer people that sign up and pay premiums, the higher that figure will go.

The net result of that is that if you are one of those people that banks part of your paycheck with the government in hopes of getting a big fat refund check, you might need to find some other savings strategy.

In 2016, for a family of four, the IRS can and will keep at least $2,780 of that refund to pay for your healthcare, or at least to pay for someone’s healthcare. If you are receiving other income, say from rentals or a business, your total gross income other than wages is factored in as well.

Granted, 1% of your income is a lot less than the cost of buying an insurance policy. Much has been made of the so-called fact that the IRS doesn’t have an enforcement mechanism in place to collect it from you other than to withhold it from your refund. No refund, no penalty, right?

C’mon folks, this is the IRS. The Supreme Court validated the fee or penalty as a tax. If you truly believe that the President will not use his famous pen to “clarify an administrative rule” for the IRS and correct that little oversight, then you have to be smoking some pretty good weed.

The most likely target in the near term is your employer. Even if you get dumped into the government insurance pool now, at some point the IRS will simply lien against your wages and assets, and the employer may be forced to withhold the tax from your paycheck. Even leaving the employer completely out of it, ask anyone who has ever had an IRS lien enforced against them, and they’ll tell you there is absolutely nothing that is safe from seizure.

Right now, the government wants you to believe they don’t know how many people have paid. That’s ridiculous on the face of it, because the government effectively owns the insurance companies. However, assuming you buy that explanation, by the time this thing has been in place for a year the insurance companies have to report their premium income on their own tax filing for 2014.

Even before that happens, there will be a calculation made to ascertain how much each policy has to cost to maintain an income sufficient to pay claims. You will certainly be able to tell if they need more money, because the premium will reflect that reality.

The new 1% is not a measurement of the richest among us. It describes all of us.

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